Analysis: Freight industry to suffer if nation goes over fiscal cliff

Monday, November 19, 2012

The large, automatic spending cuts scheduled to kick in the first week of January if Congress and the Obama administration don't reach agreement on an alternative budget-reduction plan will have a significant impact on programs critical to goods movement and has shippers worried about their business operations.
U.S. Customs and Border Protection, for example, faces the loss of more than $950 million for the current fiscal year, while the Department of Transportation is in line for a $2.1 billion hit, according to a September report by the Office of Management and Budget on the so-called "fiscal cliff."
The resulting staff cuts would impact everything from processing travelers and cargo at border checkpoints, to aviation safety and the number of food facility inspections conducted by the Food and Drug Administration.
Under a deal struck by Congress and the White House in 2011 when House Republicans refused to raise the debt ceiling without corresponding reductions in the deficit, across-the-board spending cuts would be triggered unless a bipartisan super-committee found $1.2 trillion in savings over 10 years. In addition, Bush-era tax cuts and a two-year reduction in payroll taxes to help the economy recovery from the recession are scheduled to expire. Without action, the Congressional Budget Office says the twin fiscal cudgels could plunge the United States back into recession.
Congress voted for the threat of sequestration, as the automatic budget-cutting process is called, as a mechanism to force a compromise on further deficit reduction, in addition to $1 trillion in spending caps to slow the growth of the federal budget. Democrats and Republicans so far have not been willing to budge from their philosophical approaches to taxes and the role of government.
More than $500 billion in tax increases and budget cuts are scheduled to take effect by the beginning of next year, including $65 billion enacted across the board for most federal programs. The impact of those enforced savings will be exacerbated by the fact that they will be implemented over a shorter period because there will only be nine months remaining in the current fiscal year.
The law requires that discretionary funding for non-Defense agencies be cut 8.2 percent and that direct, or mandatory, funding programs be reduced 7.6 percent.
Among the funding reductions identified for CBP, which has an $11.5 billion budget, are $27 million for the Automated Commercial Environment and other information technology needs, and $41 million from Air and Marine operations, according to the OMB document.
The cuts will have an immediate effect on fixed costs such as salaries, Al Gina, CBP assistant commissioner for international trade, told members of the National Customs Brokers and Forwarders Association of America meeting in Washington two months ago.
"It's going to be challenge to maintain efficient throughput of incoming and outgoing cargo and maintain wait times at an acceptable level" if budget cuts are 7 percent or more, he said.
Gina said the agency's attrition rate would probably not absorb the required amount of staff reductions, resulting in involuntary layoffs. The number of personnel reductions will be greater than normal because many CBP employees deferred retirement to rebuild their retirement nest eggs after the financial collapse and recession in 2008, which has increased CBP's costs for matching funds compared to having entry-level, or lower-grade replacement employees.
The Transportation Security Administration faces $643 million in funding cuts, including $429 million for aviation security and another $20 for threat assessments and credentialing programs such as the Transportation Worker Identification Card, according to OMB.
The DOT is on track to lose more than $2.1 billion in funding, including $377 for Federal Aviation Administration operations such as air traffic control, $471 million to the Highway Trust Fund that funds road and bridge building and is already in the red without bailouts from the general treasury fund, and $41 million for the Maritime Administration.
The Federal Motor Carrier Safety Administration is exempt from any funding reductions.
At last week's National Industrial Transportation League annual meeting in Anaheim, Calif., board members of the shipper association expressed deep worry about the potential impact of the political situation in Washington on their businesses.
A primary area of concern is the prospect of less funding for transportation infrastructure, which is already considered inadequate by engineers and freight industry executives to maintain safe conditions and reduce congestion. The NITL, along with other organizations, favors an increase in the gasoline and diesel taxes to help pay for road and bridge upgrades and expansion.
The personnel reductions across the government are "going to have a serious effect on the supply chain," Matt Ehrlinger, chairman and director of corporate transportation for NCH Corp., said at a meeting with reporters.
"It's going to be disruptive. How do you plan for" fewer inspectors, air traffic controllers, and administrative personnel that influence how and when conveyances and cargo move in and around the country? he said.
Gary Palmer, the head of NIT League's Highway Committee and senior director of transportation at True Value Co., said Congress has to get serious about investment in infrastructure or the economy is going to be affected, with higher costs ultimately borne by the consumer. - Eric Kulisch